On the relation between forecast precision and trading profitability of financial analysts

Carlo Marinelli, Alex Weissensteiner

    Research output: Contribution to journalJournal articleResearchpeer-review

    Abstract

    We analyze the relation between earnings forecast accuracy and the expected profitability of financial analysts. Modeling forecast errors with a multivariate normal distribution, a complete characterization of the payoff of each analyst is provided. In particular, closed-form expressions for the probability density function, for the expectation, and, more generally, for moments of all orders are obtained. Our analysis shows that the relationship between forecast precision and trading profitability needs not be monotonic, and that the impact of the correlation between the forecasts on the expected payoff of any single analyst depends on the relative accuracy of his signal.
    Original languageEnglish
    JournalJournal of Financial Markets
    Volume20
    Pages (from-to)39-60
    ISSN1386-4181
    DOIs
    Publication statusPublished - 2014

    Keywords

    • Financial analyst
    • Forecast accuracy
    • Recommendation profitability
    • Full communication equilibrium

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